Tuesday, 6 September 2016

Opinion 2/15 on the scope of EU external trade policy: Some background information before next week’s hearing

Dr Andrés
Delgado Casteleiro

Senior
Research Fellow, Max Planck Institute Luxembourg for International, European
and Regulatory Procedural Law

Introduction

On September
the 13th and 14th the Court of Justice of the EU (CJEU) will hold its hearings
for Opinion
2/15, which concerns the EU’s competence to conclude a new Free Trade
Agreement (FTA) with Singapore, in a rare sitting of the Full Court of CJEU judges. This blogpost provides a brief overview of
some of the relevant issues that will most probably play a role during the
hearings. The first part provides some context on the EU’s trade policy. The
second part focuses on the main issues concerning the EU´s competence to
conclude FTAs. The final section discusses some broader implications that Opinion 2/15 might have – in particular
for EU/UK trade relations after Brexit, and the controversial proposed EU/US
trade deal (TTIP).

EU Trade Policy after the Lisbon Treaty

One of the
main innovations introduced with Lisbon Treaty was the expansion of the scope
of the EU´s competence over external (non-EU) trade policy, which is mostly
known as the Common Commercial Policy (CCP). Article
207 TFEU extended the scope of the CCP as to encompass not only trade in
goods but also trade in services, commercial aspects of intellectual property
and foreign direct investment.

This expansion
of the CCP´s scope meant not only that those subject-matters were an EU
competence, but more importantly, following Article 3 (1) TFEU, they were all an
exclusive competence of the EU –
apart from an exception for transport services. The exclusive nature of the CCP
entails two interrelated aspects: first, only the EU can negotiate and conclude
trade agreements, and second, EU Member States cannot negotiate and conclude
agreements in that area without the prior authorization of the EU. Also,
Article 207 provides that usually the EU Council votes by qualified majority on
external trade laws and treaties, so Member States have no veto. However, Article
207 does allow for a veto as regards some aspects of services trade, or where there
is a veto in another área of EU law (tax, for instance).

In practice,
exclusive competence would make things easier for the EU in terms of
negotiating, concluding, and ratifying its international agreements, as only
the EU would be legally entitled to negotiate those agreements. By contrast,
whenever an international agreement concerns an area not covered only by EU
exclusive competence, the agreement will be concluded by both the EU and its
Member States.

Depending on
whom you ask these latter agreements, commonly known as ‘mixed agreements’,
could be seen as an awful or a great thing. On one hand, the whole process of
concluding and ratifying mixed agreements is more cumbersome, as the EU and its
28 Member States have to conclude and ratify the agreement. The ratification
process of mixed agreements normally takes years, as some Member States require
that the agreement has to be approved by their national parliaments, although
sometimes the EU agrees to apply such treaties (or parts of them) provisionally
in the meantime. On the other hand,
mixed agreements could be seen as enhancing the role of the Member States
during the negotiations, which can result on a much smoother implementation of
the agreement.

In realpolitik
terms, the discussion on whether a certain agreement should be mixed or not
hides a battle for power between the EU (mostly the European Commission) and
the Member States. As mixed agreements give more power to the Member States
(often more than they are constitutionally entitled to), it seems rather logical
that the EU Commission would like to restrict their use to the bare minimum. This
is the underlying conflict in Opinion
2/15: if the Court decides that the EU-Singapore FTA falls within the EU’s exclusive
competence, the EU would be able to conclude the agreement alone. If, on the
contrary, the CJEU decides that the FTA does not only cover areas of EU
exclusive competence, but also shared competence, or even Member States´
exclusive competence, the agreement will be concluded jointly by the EU and its
Member States.

The EU-Singapore FTA and EU competence

To what extent does the EU-Singapore FTA fall within
the scope of the EU´s (exclusive) CCP?

The
EU-Singapore FTA covers broadly speaking four áreas: goods, services, intellectual
property and investment. In relation to trade in goods, there is no doubt that this
part of the FTA falls within the scope of the EU’s exclusive trade powers. That
the CCP encompasses trade in goods has been clear since even before Opinion
1/94 – the key CJEU ruling on the scope of the EU’s trade policy powers
before the Treaty of Lisbon. Likewise,
trade in services, competition, public procurement and intellectual property would
also be covered by exclusivity. While there were some doubts about to what
extent they would be covered by article 207 TFEU, the Court seems to have cleared
those doubts in Daiichi
Sankyo as regards intellectual property, and Commission
v Council, as regards services.

The main part
of the hearings and, I would assume, the questions of the judges would concern
the extent to which the EU´s CCP competence would cover the investment chapter
of the agreement. As mentioned before, article 207 TFEU establishes that the EU
has competence over Foreign Direct Investment (FDI). Yet, what is FDI?

A first
possible way to approach the concept of FDI as enshrined in the Treaties is to
understand, that the framers have coined a new and autonomous concept of
Foreign Direct Investment. This new definition of FDI would cover all aspects
linked to investment protection as enshrined in the EU-Singapore FTA, covering
FDI stricto sensu as well as portfolio investment (ie buying minority
non-controlling shares in a business), dispute settlement and even protection against
expropriation. This position would render the investment protection provisions
of the EU-Singapore FTA an exclusive competence of the EU since they would fall
within the scope of the CCP.

The main
problem with this expansive view of the scope of the EU’s competence over FDI is
that would contradict both the international and EU (internal) definitions of
FDI. Therefore, it seems rather unlikely that the Court would coin a new
understanding of FDI completely detached from the international concept and
irrespective of the Court’s case law on direct investment.

A second
possible definition of FDI that the Court could give would follow the international
definition of FDI that excludes portfolio investments from its scope. This
definition of FDI can be found in multiple OECD and IMF instruments. Moreover,
it would also be in consonance with the definition of direct investment that
the CJEU has developed in its internal market case law (see Angelos Dimopoulos,
EU
Foreign Investment Law (OUP, 2011)). Given that the EU-Singapore FTA
defines investment in a very broad way as to include: “every kind of asset
which is owned, directly or indirectly or controlled, directly or indirectly by
investors of one Party in the territory of the other Party, that has the
characteristics of an investment, including such characteristics as the
commitment of capital or other resources, the expectation of gain or profit,
the assumption of risk, or a certain duration”, this reading of the FDI
competence would entail that not everything in the Investment Protection
chapter would be covered by the CCP. Therefore, those parts not covered by the
CCP would be covered either by other EU implied powers, or by EU Member States’
competences. I think that most probably this will be definition of FDI that the
CJEU will favour, since it is in line with its internal case law and the
relevant international instruments.

The third
possible understanding of the scope of the FDI as enshrined in the CCP is the
most restrictive one of all three. Based on a literal reading of Article 206
TFEU, it would argue that the EU’s exclusive competence does not cover all
aspects related to FDI but instead it only covers the issue of the initial admission
of FDI. Article 206 TFEU provides that among the CCP objectives, the
progressive abolition of restrictions on international trade and on foreign
direct investment is the aspect of FDI which has been entrusted to the EU (Jan Asmus Bischoff,
'Just a little bit of “mixity”? The EU’s role in the field of
international investment protection law' (2011) 48 Common Market Law
Review, Issue 5, pp. 1527–1569). Consequently, post-admission measures
would fall outside the scope of the CCP. This narrow reading of FDI under the
CCP would very much restrict the EU’s powers in the field of FDI, and it seems
rather unlikely that the Court given its expansive view of the CCP would adopt
it.

Does the EU have any other exclusive competence covering
certain aspects of the EU-Singapore FTA?

If the Court
decided to choose either the second or third possible definition of the scope
of the FDI competence, it would then have to establish whether there are any other implied and exclusive powers that
would cover those aspects of the investment chapter of the EU-Singapore FTA not
covered by the FDI exclusive competence. This question is especially
interesting as regards portfolio investment and whether there might be an
implied and exclusive power stemming
from Article 63 TFEU concerning the free movement of capital from non-EU
countries.

The Commission
in its Communication
“Towards a comprehensive European international investment policy” (COM (2010)
343 final) argues in this direction: “to the extent that international
agreements on investment affect the scope of the common rules set by the
Treaty's Chapter on capitals and payments, the exclusive Union competence to
conclude agreements in this area would be implied.” This would mean that one
way or another both FDI and portfolio investments would be covered by an EU
exclusive competence, so in principle there would no need for the participation
of EU Member States in the EU-Singapore FTA based on the inclusion of an
Investment Protection chapter in it.

However, it is
not very clear how that competence would be exclusively implied since free
movement of capital is a shared competence, and the EU has not exercised its
competences under Article 64 (2) and 66 TFEU. Thus, it would be difficult to
argue that the implied powers doctrine would apply since there is no internal
legislation to be affected (P Eeckhout, EU
External Relations Law (Oxford, OUP, 2011)). Yet, it would not be impossible,
since the EU has established a harmonized regulatory framework for portfolio
investments within the EU that makes reference to relations with non-EU
countries.

Therefore, it
would appear that portfolio investments could be an area largely covered by
Union rules (Angelos Dimopoulos, EU
Foreign Investment Law (OUP, 2011), p 105), which is the threshold in the
case law for determining whether the doctrine of implied and exclusive powers
could be applied. Recent case-law on implied powers does not give much clue
about how the CJEU could see the issue. While the CJEU has been flexible in
understanding whether a certain area is largely covered by Union rules, the
fact that these rules must be affected has started to figure prominently in the
Court’s reasoning (see Opinion
1/03, Opinion
1/13 and the broadcasting
rights case), though not applied in a fully consistent fashion.

Implications of Opinion 2/15

Opinion 2/15
will not only determine whether the EU-Singapore FTA falls within EU exclusive
competence, but could have the potential in setting tone for the next FTAs
currently being negotiated or in the process or being signed. In other words,
if the EU-Singapore FTA is found to fall within EU’s exclusive competence, the
next EU FTAs could be concluded only by the EU. Conversely, if it is not within
the EU’s exclusive competence, future EU FTAs will likely be mixed agreements.

This is
especially relevant when one considers that the issues covered in the
EU-Singapore FTA are the same kind of issues currently being discussed in the controversial
EU-US negotiations on the TTIP. An Opinion
2/15 ruling establishing a broad scope for the EU’s CCP could allow the EU
conclude the TTIP without its Member States alongside, making the ratification
process far faster and, more importantly, less prone to surprises within the
national parliaments´ ratification processes. By establishing that the TTIP can
only be concluded by the EU, only the European Parliament would have to consent
to the agreement. While this is by no means an easy task (see the EP´s position
on the ACTA
and (at first) the SWIFT
Agreements), it is a far easier task than getting the TTIP ratified by the EU
and its 28 Member States. Given the opposition of most of the European left and
some parts of the right to the TTIP, I doubt that the TTIP would survive its
ratification process if it is deemed a mixed agreement following Opinion 2/15.

Furthermore,
if, as it looks right now, the UK government might prefer to settle its new
relationship with the EU after BREXIT with an FTA (Canada + type of agreement)
the Court’s opinion could potentially decide whether EU Member States have a veto
in negotiating the new trade relationship with the UK. As Robert Peston has suggested,
this may prove to be a key political issue in the UK/EU negotiations, as it
will be harder for the UK to achieve its negotiating objectives if the
remaining Member States all have a veto.

However, it
must be pointed out that regardless of whether the Opinion finds that the EU
has exclusive competence over the matter covered in the FTA, politics can overrun
these legal considerations, as the Commission sadly reminded us back in June. Its
decision to propose
that CETA (the EU-Canada FTA) must be a mixed agreement regardless of the
competences involved and the Commission´s Legal Service opinion marks a very
worrying precedent that could undermine the effectiveness of the Lisbon Treaty
reforms were Opinion 2/15 to conclude
that the EU has exclusive competence to conclude FTAs.

5 comments:

What happened at the hearings? I found it listed in French at http://curia.europa.eu/jcms/jcms/Jo1_6581/en/ 'Avis rendu en vertu de l'article 218, paragraphe 11, TFUE', but the links don't go anywhere. Andrew

May I ask if the question concerns the negotiation of or the ratification of mixed agreements? These are two different questions because authority to negotiate and the ratification procedure of agreements engaged areas of exclusive Member competence in principle are separate issues. Also, the EU itself does not have ISDS for itself so why then hijack an FTA to impose it on them? Relevant to Brexit of course.

Member States sometimes agree that the Commission can negotiate on their behalf, but then wish to assert their position as regards ratification, if that's what you mean. This case is about ratification, since the treaty has already been negotiated. Some Member States do have investment treaties between each other but there is a separate legal dispute pending about that.